While it can be be tempting to ignore a mounting unpaid debt problem in a Limited Company, it is the worst thing a business owner can do.
If a business is a limited company, there are many avenues open to the Business owners to resolve debt-related problems. So, where does someone start?
Different types of business debt
Firstly, it needs to be established what debt the company currently owes:
1. typical Business borrowing, e.g. overdraft, bank loans, vehicle finance etc
2. Credit provided by suppliers and via factoring or invoice discounting
3. Money invested in the business by directors or others, usually in the form of cash, personal loans, or personal guarantees
4. Liabilities owed to HMRC for PAYE, VAT and Corporation Tax
A Business owner will need to assess the impact of the debt on their business. If the debt is manageable and cash flow is healthy, it is not necessarily an issue.
If, however, a Business owner is discovering that the debt is absorbing any profit and new customers are dwindling, the problem cannot be ignored.
Beware of trading while insolvent
A business needs to be aware if it is trading whilst insolvent. There are highly technical tests but, in essence, it’s whether someone looking at a businesses situation would reasonably expect that it could trade your way out of your difficulties.
If the answer is yes that’s fine. If no, then a business should seek immediate professional advice because you the Directors could lose their indemnity if they carry on trading whilst insolvent.
Assuming this is not the case, a business owner should need to consider if they wish to carry on. They should also think carefully before investing personal funds, especially if they are secured against a home.
If a Business owner decides not to carry on, there are broadly two scenarios. These are where the business continues as a going concern and where it ends.
Continuing as a going concern
If a company wants to continue as a going concern, there are three main routes that can taken
1. Informal Negotiation with creditors
A business owner needs to decide whether to negotiate formally or informally with creditors. If the business has no real assets, nor much value, the negotiation position is a strong one.
2. Company Voluntary Arrangement (CVA)
A formal route will require the services of an Insolvency Practitioner (IP) who will typically charge £200 plus per hour.
If a business owner can present a reasonable scenario for trading out of difficulties, an IP can propose a Company Voluntary Arrangement (CVA).
This might write off 60% of the debt and reschedule the balance over several years if the majority of creditors (by value) vote in favour. Many CVAs, however, fail, probably because the business was flawed in the first place.
If someone who would like to buy the company, minus its debts, Administration is an option. This is where the business is run by the Insolvency Practitioner. This is expensive so a better option is often to put the company into Administration and sell it on the same day.
The buyer gets the business without any debts but the original owner loses their shares and investment. However, there is nothing to stop the new owners from employing the previous directors.
If a Limited Company wants to cease trading
Should a business owner come to the conclusion that their company should cease trading, there are two main options
Liquidation is similar to administration but there is no attempt to sell the business as a going concern. The business stops, the assets (if any) are sold and distributed (after fees) to creditors. This typically costs from £6,000
2. Company Dissolution
This is the simplest way to close a business, especially a small one with little or no assets. The Small Business simply stops trading and informs creditors.
Mostly, unless a creditor is acting for personal reasons, they won’t take any action. However, there are exceptions; building supply companies will often issue winding up proceedings and, if the debts are significant, HMRC may also take robust debt collection action.
If none of the creditors take action, you wait three months and Companies House removes the company from its register. Usually, this will be the end of the matter. Legally, however, any of your creditors can have the company reinstated and take action against it.
Remember, these options apply to limited companies only. For self employed and sole traders, there is no legal separation between personal and business debts.
Similarly, if you have borrowed personally to invest in the business, or have provided personal guarantees, these will remain.
Cash flow issues due to debtors
If a Business is owed money due to their own unpaid invoice issues, then they need to take action. The most cost effective form to recover unpaid debts is by working with a Professional Debt Collection Agency. Hiring a Debt Collection Agency is not a straight forward exercise and a Business should only ever consider working with a reputable debt collection solution.
Very often, Limited Company cash flow issues can be causes by ineffective Business credit control.